FOREIGN  EXCHANGE 


BWV.  OF  CALIF.  LIBRARY.  LOS   ANGKT , 


Foreign  Exchange 


HON.  ROBERT  L.  OWEN 

UNITED   STATES   SENATOR   OF   OKLAHOMA 

CHAIRMAN    OF   THE    UNITED    STATES   SENATE   COMMITTEE 
ON   BANKING  AND   CURRENCY 


NEW  YORK 

THE  CENTURY  CO. 

1919 


Copyright,  1919,  by  Robert  L.  Owen 


FOREIGN   EXCHANGE 


21,33757 


FOREIGN  EXCHANGE 

THE  FEDERAL  RESERVE 
FOREIGN  BANK 

PUT  THE  AMERICAN  DOLLAR  AT  PAR 

IN 
FOREIGN  EXCHANGE 

BECAUSE  of  war  conditions  the 
American  dollar  is  at  a  serious 
discount  in  all  of  the  neutral  coun- 
tries of  Europe  and  throughout  the 
world,  notwithstanding  the  fact  that 
the  United  States  had  a  favorable 
balance  of  trade  of  over  three  thou- 
sand millions  last  year,  and  ten  thou- 
sand millions  since  the  war  began. 
It   is   important   that   American 
[il 


FOREIGN    EXCHANGE 

business  men,  American  bankers, 
American  importers  and  exporters 
should  understand  this  problem  and 
the  remedy  for  it. 

The  problem  is  not  really  a  diffi- 
cult one.  It  is  the  purpose  of  this 
little  book  to  explain  the  problem ;  to 
show  the  factors  entering  into  it; 
to  show  the  remedy  and  point  the 
path  and  mechanism  by  which  to 
maintain  the  American  dollar  at  par, 
and  make  it  the  medium  of  inter- 
national exchange  and  of  interna- 
tional contracts. 

THE   U.    S.   DOLLAR  IN   SPAIN 

The  American  dollar  should  buy 
5.18  pesetas,  lire  or  francs  on  a  gold 
par  basis,  but  at  present  (August, 
1918)  will  buy  8.90  Italian  lire  and 
about  3.5  Spanish  pesetas,  although 

[2] 


FOREIGN   EXCHANGE 

the  gold  value  of  the  Italian  lira  and 
the  Spanish  peseta  is  identical.  The 
reason  for  this  is  that  Italy  has  an 
urgent  demand  for  dollars  in  Amer- 
ica to  pay  for  the  purchases  of  the 
Italian  Government  and  of  the  Ital- 
ian people,  and  the  credits  being 
extended  to  Italy  for  this  purpose 
are  being  furnished  at  enormously 
high  rates  by  private  banks  and  cap- 
italists, while  Spain  is  selling  more 
commodities  than  she  is  buying,  is 
an  international  creditor,  has  no 
need  for  dollars,  and  pesetas  in  Spain 
are  being  sold  at  an  artificial  high 
price  by  private  banks  and  capital- 
ists. The  Allies  requiring  Spanish 
pesetas  are  being  charged  enormous- 
ly high  rates  for  the  pesetas  re^ 
quired  in  Spain,  which  means  that 
the  pesetas  are  selling  for  28  cents 
apiece  instead  of  19  cents  and  that 

[3] 


FOREIGN    EXCHANGE 

the  gold  dollar  measured  in  pesetas 
is  at  a  heavy  discount  and  only 
worth  67  cents. 

The  gold  dollar  in  New  York  in- 
stead of  buying  67  cents'  worth  of 
Spanish  gold  currency  should  buy  50 
per  cent,  more  than  it  does,  and 
American  and  Allied  purchasers  of 
Spanish  goods  suffer  this  50  per  cent, 
loss  with  the  added  penalty  of  war 
prices  which  makes  the  50  per  cent, 
loss  probably  100  per  cent.,  to  which 
must  be  added  the  merchants'  profit. 

It  is  obvious,  therefore,  that  the 
loss  to  the  United  States  and  to  the 
Allies  from  a  condition  of  this  char- 
acter ought  to  be  promptly  met.  It 
can  be  done.  It  is  necessary  to  un- 
derstand foreign  exchange,  the  fac- 
tors entering  into  it,  the  means  by 
which  to  economically  settle  inter- 
national commodity  trade  balances 

[4] 


FOREIGN   EXCHANGE 

and  to  provide  the  mechanism  under 
Government  control  through  which 
the  steps  can  be  taken  to  obtain  the 
desired  results. 

I  desire,  therefore,  to  explain  the 
factors  entering  into  foreign  ex- 
change, the  steps  required  to  bring 
the  dollar  to  par,  the  steps  required 
to  keep  the  dollar  at  par,  and  the 
mechanism  necessary  to  make  effec- 
tive the  proposed  policy. 

FOREIGN   EXCHANGE    DEFINED 

Foreign  exchange  is  a  broad  term 
referring  to  the  business  of  inter- 
national bills  of  exchange.  These 
bills  of  exchange  take  the  form  of 
drafts  representing  an  evidence  of 
debt  in  the  form  of  a  negotiable  in- 
strument, the  drawer  or  maker  con- 
stituting the  creditor,  the  drawee  the 

[5] 


FOREIGN   EXCHANGE 

debtor,  and  the  title  to  such  bill 
being  vested  in  the  payee.  These 
drafts  take  the  form  of  acceptances, 
often  endorsed  by  acceptance  bank- 
ing companies.  When  drawn  against 
merchandise  exported  they  are  often 
accompanied  by  documents — such  as 
the  receipt  of  the  transportation 
company,  or  bills  of  lading,  certifi- 
cates of  insurance,  certificates  of  in- 
spection, weight,  etc.  These  foreign 
bills  of  exchange  may  be  drawn 
against  securities  which  are  sold  as 
merchandise.  They  may  appear  as 
authorized  commercial  or  banking 
credits  or  as  finance  bills. 

They  may  be  drawn  against  actual 
cash  funds  or  credits  in  banks,  but, 
whatever  they  are,  they  comprise 
at  last  merely  the  order  of  the  drawer 
or  maker  upon  the  drawee  or  debtor 
to  pay  to  a  payee  a  certain  amount 

[6] 


FOREIGN   EXCHANGE 

of  money  in  the  currency  of  the 
country  upon  which  they  are  drawn, 
in  pounds  sterling  in  London,  in 
pesetas  in  Spain,  in  francs  in  France, 
in  lire  in  Italy,  in  dollars  in  New 
York.  The  forms  of  these  bills  are 
well  established  and  can  be  found  in 
any  of  the  many  comprehensive 
works  on  international  exchange. 
These  bills  may  be  at  sight,  pay- 
able on  presentation,  or  thirty,  sixty, 
or  ninety  days;  they  may  be  with 
documents  attached  or  without  doc- 
uments attached;  they  may  be  ac- 
ceptance bills  or  payment  bills.  The 
scope  of  this  book  does  not  permit  of 
an  elaborate  discussion  of  the  mere 
forms  of  such  bills  or  the  mechanism 
employed  by  the  banks  in  handling 
such  bills  or  the  mathematics  of 
converting  one  currency  into  an- 
other. 

[7] 


FOREIGN    EXCHANGE 
BALANCE   OF   TRADE 

When  a  country  is  shipping  more 
goods  in  the  form  of  commodities 
than  she  is  receiving,  it  is  said  that 
the  balance  of  trade  is  favorable. 
The  term  "balance  of  trade"  is 
apt  to  be  misleading.  It  is  a  con- 
venient phrase  relating  to  com- 
modity shipments  alone  as  they 
appear  on  the  record  of  outgoing 
and  incoming  ships,  which  are  always 
subject  to  Government  inspection 
and  from  which  a  definite  and  ac- 
curate compilation  can  be  made  and 
is  made.  If  such  "balance  of 
trade"  runs  against  a  country  the 
actual  balance  of  commodity  in- 
debtedness must  be  made  up  by 
shipments  of  gold,  securities  or 
transfer  of  credits. 

Outside  of  commodities  which  ap- 

[8] 


FOREIGN   EXCHANGE 

pear  in  making  up  the  balance  of 
trade  there  are  a  number  of  invisible 
factors,  not  of  statistical  public  rec- 
ord, which  go  to  determine  the  extent 
to  which  the  citizens  of  one  country 
may  be  indebted  to  those  of  another, 
and  by  which  the  international  debts 
are  actually  settled.  These  elements 
are  not  absolutely  available  in  the 
form  of  statistics  and  can  be  only 
roughly  estimated.  Taking  the 
United  States  as  an  example,  there 
are  certain  factors  not  tabulated  by 
the  Bureau  of  Statistics  at  Washing- 
ton because  their  proportions  are  un- 
known to  the  officials.  These  are 
the  elements  which  comprise  the 
invisible  factors  in  determining  the 
settlement  of  international  debts. 
The  transfer  of  money  or  credit 
from  the  United  States  to  other 
countries  (outside  of  commodities) 

[9] 


FOREIGN   EXCHANGE 

is    accomplished   in    the    following 
ways: 

FACTORS  AFFECTING  INTERNATIONAL 
EXCHANGE 

1st.  The  purchase  by  citizens  or  cor- 
porations in  the  United  States  of 
securities  or  properties  of  any  kind 
(outside  of  commodities  actually 
shipped,  otherwise  accounted  for) 
in  other  countries; 

2nd.  The  payment  of  interest  or  divi- 
dends on  American  securities  and 
properties  owned  by  foreigners; 

3rd.  The  payment  of  loans  due  foreign- 
ers; 

4th.  The  payment  of  passenger  and 
freight  rates  to  foreigners  owning 
foreign  vessels; 

5th.  Money  expended  by  Americans 
touring  abroad; 

6th.  Remittances  by  foreigners  in  the 
United  States  to  their  friends  or 
dependants  abroad; 
[10] 


FOREIGN   EXCHANGE 

7th.  Loans  by  the  United  States 
to  foreign  countries,  which  dur- 
ing this  war  are  reaching  gigan- 
tic proportions,  or  loans  by 
U.  S.  banks  or  citizens  to  for- 
eigners; 

8th.  Remittances  from "  the  United 
States  to  pay  for  foreign  securities 
marketed  in  the  United  States, 
which  have  reached  very  large 
proportions  during  this  war 

In  like  manner  all  of  these  unre- 
corded factors  or  any  of  them  may 
apply  to  any  of  the  foreign  countries 
and  transfer  money  or  credits  to  the 
United  States.  For  instance: 

1st.  The  purchase  by  foreign  banking 
corporations  or  individuals  of 
American  securities  or  properties; 

2nd.  The  payment  of  interest  or  divi- 
dends on  foreign  securities  or  prop- 
erties held  by  American  capital- 
ists; 

[ill 


FOREIGN    EXCHANGE 

3rd.  The  liquidation  of  loans  nego- 
tiated by  Europe  or  foreign  bank- 
ers in  America; 

4th.  The  payment  to  Americans  of 
passenger  and  freight  service  on 
American  ships  by  foreigners; 

5th.  The  money  expended  in  America 
by  foreign  persons  traveling  in 
America; 

6th.  Remittances  to  persons  within  the 
United  States  from  foreign  friends 
or  relatives; 

7th.  The  lending  of  money  to  the 
United  States,  or  to  citizens, 
bankers,  or  corporations  of  the 
United  States  by  foreign  Govern- 
ments, bankers,  or  citizens  who 
might  make  loans  on  American 
bonds  or  American  evidences  of 
debt; 

8th.  The  payment  for  insurance  due  to 
American  Insurance  companies. 

The   "balance  of  trade"   relates 
only  to  commodity  shipments.  When 

[121 


FOREIGN    EXCHANGE 

a  country  ships  less  commodities 
than  it  receives  it  must  make  up  the 
difference  by  shipping  gold,  shipping 
securities,  transferring  bank  credits, 
or  rendering  service,  such  as  insur- 
ances, passenger  and  freight,  wharf- 
age and  dockage,  or  entertaining 
travelers. 

COMMODITIES   PAY   FOR   COM- 
MODITIES 

If  the  term  "commodities"  were 
broad  enough  to  cover  all  of  these 
factors,  then  it  might  be  properly 
said  that  the  debts  of  the  citizens  of 
one  nation  to  the  citizens  of  another 
nation  were  all  covered  by  exchange 
of  commodities. 

This  is  so  far  recognized  that  it  is 
a  common  expression  to  say  that  all 
imports  are  paid  for  by  exports,  be- 

[13] 


FOREIGN   EXCHANGE 

cause  no  nation  can  except  for  a 
limited  time  pay  its  commodity  trade 
balance  in  gold  without  exhausting 
the  gold  upon  which  the  credit  of  its 
currency  is  based. 

GOLD  EMBARGO  AND  DOLLAR  PARITY 

The  reason  of  the  gold  embargo  in 
Great  Britain  and  in  France,  in  the 
United  States  and  in  Germany  at 
this  time  is  that  it  is  of  recognized 
importance  that  there  should  be 
available  a  sufficient  supply  of  gold 
to  safeguard  the  paper  money  issued 
by  these  nations.  For  unless  the 
paper  currency  is  always  freely  ex- 
changeable for  gold  the  people  would 
be  unwilling  to  receive  the  paper 
money  on  a  par  with  gold.  When  the 
paper  money  is  not  on  a  par  with 
gold  the  people  immediately  would 

[14] 


FOREIGN   EXCHANGE 

pay  their  debts  in  terms  of  the 
cheaper  currency,  and  every  con- 
tract in  the  country  would  be  dis- 
turbed by  the  standard  measure  of 
value  of  contracts  being  thus  sud- 
denly impaired.  People  in  the 
United  States,  for  example,  enter 
into  millions  of  contracts  measured  in 
terms  of  dollars  and  they  do  not  say 
a  gold  dollar,  unless  it  be  in  some 
formal  important  contract,  so  that  if 
the  dollar  in  paper  money  should  not 
be  equal  in  value  to  a  dollar  in  gold, 
all  those  owing  dollars  in  such  current 
business  would  meet  their  debts  in 
the  paper  dollar.  All  business  people 
recognize  the  importance  of  main- 
taining the  American  dollar  at  par 
in  domestic  transactions.  It  was  a 
day  of  triumph  after  the  Civil  War 
when  the  United  States  reached  a 
point  at  which  "  resumption  of  specie 

[15] 


FOREIGN    EXCHANGE 

payment"  occurred;  a  never-to-be- 
forgotten  day  in  America's  financial 
history.  The  American  people  would 
not  submit  for  a  moment  to  have 
their  paper  money  worth  ninety- 
nine  cents  on  the  dollar;  they  de- 
mand it  shall  be  worth  a  hundred 
cents  on  the  dollar,  yet  we  are  faced 
with  the  astonishing  condition  that 
an  American  gold  dollar  in  New 
York,  under  embargo,  is  worth  only 
67  cents  in  Spain  at  28.50  cents  per 
peseta  normally  19.30  cents. 

In  other  words,  a  gold  dollar  in 
New  York  worth  sixty-seven  cents 
in  Spain  must  have  fifty  per  cent, 
added  to  it  to  buy  one  hundred 
cents'  worth  of  Spanish  oil  in 
Barcelona.  It  takes  three  such 
gold  dollars  in  New  York  to  be 
worth  two  gold  dollars  by  weight 
in  Spain. 

[16] 


FOREIGN   EXCHANGE 

WHAT  IS  THE  EFFECT  OF  THE  AMER- 
ICAN DOLLAR  AT  A  DISCOUNT  IN 
SPAIN? 

The  effect  is  that  we  pay  three 
dollars  in  gold  in  New  York  and 
get  two  dollars  of  gold  credit  in 
Spain.  Our  money  buys  fifty  per 
cent,  less  than  it  ought  to.  The 
same  thing  is  true,  of  course,  of 
a  British  pound  sterling  and  of 
the  French  franc.  It  is  perfectly 
obvious  that  this  rate  of  exchange 
is  imposing  a  ruinous  cost  upon 
the  United  States  and  the  Allies 
— just  to  the  extent  that  they  are 
compelled  to  buy  pesetas  at  this 
rate  for  the  purpose  of  making 
purchases  in  Spain.  It  must  be 
remembered  also  that  the  prices 
in  Spain  are  on  a  war  basis  —  in 
other  words,  that  commodities  have 

[17] 


FOREIGN    EXCHANGE 

nearly  doubled  in  price,  even  in 
terms  of  Spanish  money  so  that 
the  fifty  per  cent,  extra  which  we 
pay  in  gold  for  Spanish  currency 
is  in  reality  doubled,  and  this  ex- 
change is  thus  actually  costing  us 
nearly  one  hundred  per  cent.  In 
the  meantime  to  correct  this  our 
country  has  adopted  the  question- 
able policy  of  imposing  an  em- 
bargo on  the  shipment  of  Spanish 
goods  to  the  United  States,  or  the 
buying  of  Spanish  goods  by  American 
merchants.  The  effect  of  this  is  that 
olive  oil  has  gone  from  two  and  a 
fraction  dollars  a  gallon  to  eight  and 
ten  dollars  a  gallon,  as  every  Amer- 
ican business  man  should  know.  The 
commodity  embargo  policy  is  unde- 
sirable, for  there  is  a  much  better 
policy  available  which  I  wish  to 
point  out. 

[18] 


FOREIGN  EXCHANGE 

THE  CAUSE  OF  THE  DEPRECIATION  OF 
THE  AMERICAN  DOLLAR  ABROAD 

The  imports  and  exports  from  the 
United  States  in  1917  amounted  to 
over  nine  billion  dollars.  The  exports 
amounted  to  six  billion,  two  hundred 
and  thirty-one  million;  the  imports 
to  two  billion,  nine  hundred  and 
fifty-two  million,  with  a  favorable 
balance  of  trade  to  the  United  States 
of  approximately  three  billion,  one 
hundred  and  eighty  million.  I  sub- 
mit on  the  following  pages  a  table 
of  these  imports  and  exports: 


FOREIGN    EXCHANGE 


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FOREIGN   EXCHANGE 


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FOREIGN    EXCHANGE 


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[22] 


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3 


FOREIGN    EXCHANGE] 


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[23] 


FOREIGN   EXCHANGE 

It  will  be  seen  from  this  table  that 
our  commodity  trade  balance  with 
Spain  was  in  our  favor  by  fifty-five 
million,  five  hundred  eighty-seven 
thousand,  six  hundred  and  ninety 
dollars.  Therefore,  Spain  needed 
fifty-five  million  dollars  more  than 
was  due  her  on  the  difference  of 
shipments  to  Spain  from  the  United 
States  of  commodities,  and  the  ship- 
ment of  commodities  by  Spain  to  the 
United  States.  Why,  then,  was  not 
the  dollar  at  a  premium  instead  of 
the  Spanish  peseta  being  at  a  pre- 
mium? The  reason  was  that  the 
United  States  had  loaned  to  her 
Allies  two  billion  dollars  more  than 
the  favorable  "trade  balance"  of 
the  United  States,  and  these  loans 
in  terms  of  dollars  had  been  used  by 
our  Allies  to  settle  their  debts  with 
Spain,  as  an  international  commodity 

[24] 


FOREIGN   EXCHANGE 

trade  creditor  to  an  approximate 
amount  of  over  a  hundred  million 
of  dollars  in  value,  who  did  not 
need  these  dollars,  or  pounds  ster- 
ling, or  francs.  The  Spanish  banks 
did  place  substantial  balances  in 
Paris,  London  and  New  York,  but 
there  was  still  due  to  Spain  for  com- 
modities a  large  amount  which  had 
to  be  settled  in  some  way.  Great 
Britain,  France  and  the  United 
States  had  an  embargo  on  gold  and 
we  could  not  settle  these  balances  by 
gold  because  of  the  gold  embargo. 
If  we  had  settled  the  balances  in 
gold  the  dollar  would  have  gone  to 
par  and  so  would  have  the  pound 
sterling  and  the  French  franc,  but 
we  were  compelled,  because  gold  was 
not  available,  to  borrow  this  money 
from  Spain  in  some  form  or  other, 
and  it  was  borrowed  in  some  form  or 

[25] 


FOREIGN    EXCHANGE 

other  from  Spanish  merchants,  busi- 
ness men,  and  Spanish  banks  in  many 
ways,  but  those  who  borrowed  the 
pesetas  from  Spain,  or  those  who 
loaned  our  people  the  pesetas  in 
Spain,  sold  those  pesetas  to  the  citi- 
zens of  the  United  States  at  a  tre- 
mendous price.  The  credit  extended 
is  taking  advantage  of  war  condi- 
tions to  extort  an  unendurable  price 
for  the  use  of  this  Spanish  credit 
during  the  war,  and  fully  justifies 
adequate  steps  being  taken  to  cor- 
rect it. 

PENALTY  OF  APPRECIATED  CURRENCY 

In  fact  the  natural  laws  of  eco- 
nomics impose  at  once  a  severe  pen- 
alty upon  Spain,  for  example:  Amer- 
ica has  quit  buying  Spanish  oil; 
America  is  substituting  peanut  oil, 

[26] 


FOREIGN   EXCHANGE 

and  the  world  is  finding  means  to  get 
along  with  a  minimum  use  of  Span- 
ish commodities.  In  the  meantime 
it  is  dislocating  Spanish  business, 
which  will  reappear  later  as  a  very 
substantial  loss  to  Spanish  com- 
merce. 

The  Allies  are  buying  only  essen- 
tials in  Spain,  and  the  non-essential 
business  of  Spain  is  going  through 
commercial  depression. 

Spain  lost  almost  her  entire  grape 
crop,  her  tomato  crop  and  other  per- 
ishable articles  because  there  was  no 
adequate  market. 

Because  Spain  was  piling  up  cred- 
its not  properly  employed  in  being 
loaned  at  acceptable  interest  she  was 
led  to  purchase  non-essentials  at  war 
prices,  doing  Spain  a  commercial  in- 
jury. While  certain  individual  banks 
or  bankers  might  profit  by  the  sale 

[27] 


FOREIGN   EXCHANGE 

of  pesetas  at  the  high  rate,  it  has 
the  effect  of  permanently  divert- 
ing trade  from  Spain,  stimulating 
exports  to  Spain  of  commodities  at 
high  prices  and  depressing  exports 
from  Spain  to  other  countries, 
lowering  the  status  of  the  commer- 
cial life  of  Spain  so  that  Spain  pays 
a  serious  penalty  under  the  eco- 
nomic law. 

It  would  have  been  much  better 
for  Spain  to  buy  Spanish  securities 
held  by  foreign  countries,  to  make 
temporary  loans  to  countries  com- 
pelled to  buy  in  excess  from  Spain, 
or  to  the  nationals  of  such  countries 
against  adequate  securities — better 
for  Spain  and  better  for  her  com- 
mercial customers.  True  commerce 
in  its  highest  and  best  form  serves 
equally  well  both  parties  to  such 
commerce. 

[28] 


FOREIGN    EXCHANGE 

Spain  also  adopted  the  policy  of 
refusing  to  take  foreign  gold  except 
at  a  discount,  on  the  theory  that  she 
did  not  desire  to  expand  her  cur- 
rency, and  in  that  way  cause  a  rise 
in  the  price  of  labor  and  commodities 
in  Spain.  The  effect  of  this  was  to 
deprive  other  nations  of  a  fair  means 
of  settling  commodity  trade  balances 
with  Spain,  and  had  the  effect  of 
automatically  raising  the  prices  to 
foreigners  of  Spanish  commodities, 
thus  serving  to  dislocate  Spanish 
trade. 

These  unfavorable  conditions  in 
Spain  have  also  led  many  people  in 
the  Entente  Allied  Countries  to  be- 
lieve the  Spanish  policy  was  swayed, 
if  not  controlled,  by  German  in- 
fluences and  after  this  war  this 
opinion  may  prove  commercially  in- 
jurious to  Spain. 

[29] 


FOREIGN  EXCHANGE 

HOW  TO  PUT  THE  DOLLAR  AT  PAR 

What  are  the  possible  remedies  for 
this  discount  of  the  American  dollar 
in  Spam? 

1st.  The  shipment  of  gold  in  such  vol- 
ume as  to  meet  the  international 
commodity  trade  balance  in  favor 
of  Spain  would  at  once  put  the 
dollar,  the  pound  sterling  and  the 
French  franc  to  par,  but  in  order 
to  safeguard  the  currencies  of  the 
nations  during  the  war  it  is  not 
deemed  expedient  to  ship  gold  at 
this  time.  When  the  war  closes 
Spain,  having  depleted  itself  in 
commodities  and  having  accumu- 
lated for  these  commodity  ship- 
ments large  volumes  of  credits, 
will  be  in  a  position  immediately 
to  buy  from  other  countries  and 
she  will  become  almost  at  once  a 
commodity  trade  debtor,  which 
will  bring  Spanish  currency  down 
to  par  and  bring  the  currency  of 
other  countries  up  to  par  in  Spain; 
[30] 


FOREIGN   EXCHANGE 

2nd.  Cutting  off  purchases  from  Spain 
of  commodities  and  expanding  the 
shipment  of  commodities  to  Spain 
would  be  another  factor  of  im- 
portance in  bringing  Spanish  cur- 
rency down  to  par  and  other 
currencies  up  to  par,  but  is  injuri- 
ous both  to  Spain  and  to  the 
countries  driven  to  adopt  this 
policy. 

[This  remedy  is  only  partially 
available  because  the  Allies  for  war 
purposes  need  available  Spanish  com- 
modities and  are  only  cutting  off  non- 
essential  goods,  depressing  Spanish 
commerce  engaged  in  what  are  not 
necessities  for  war  and  unduly  stimu- 
lating Spanish  business  in  commodi- 
ties required  for  war.  The  undue 
stimulation  of  one  line  of  commodi- 
ties and  the  depreciation  of  another 
line  of  commodities  is  injurious  to 
the  normal  business  of  Spain  and  at 

[311 


FOREIGN    EXCHANGE 

whatever  price  will  be  corrected  with 
the  revival  of  peace  by  an  injurious 
reaction  of  the  industries  engaged  in 
commodities  required  for  war,  while 
other  industries  not  required  for  war 
which  have  been  impaired  must  be 
rehabilitated.] 

3rd.  The  remaining  and  most  available 
and  economical  factor  by  which 
this    unhealthy    condition    of    a 
highly  appreciated   Spanish  cur- 
rency   and    severely    depreciated 
Allied  currency  in  Spain  can  be 
corrected,  is  by  credits  extended  by 
Spanish  banks  and  Spanish  mer- 
chants and  Spanish  business  people 
during  the  period  of  the  war  to  the 
extent  of   their  favorable   trade 
balance.     This    can    be    accom- 
plished in  various  ways: 
(a)  Spanish  banks  can   leave  bal- 
ances in  New  York,  London 
and  Paris.  They  are  doing  this 
but  not  on  a  basis  of  a  fair 
rate  of  interest,  superficially, 
[32] 


FOREIGN   EXCHANGE 

because  these  balances  in  New 
York,  for  example,  are  only 
paying  two  or  three  per  cent. 
However,  since  the  Spanish 
pesetas  are  sold  for  American 
dollars,  selling  on  the  exchange 
for  but  sixty-seven  cents  in 
New  York,  the  Spanish  banks 
buying  such  dollars  will  make 
a  profit  of  fifty  cents  when 
the  war  ends  and  the  dollar 
reacts  to  par. 

The  same  thing  is  true  of  United 
States  banks  that  buy  pesetas  in 
Spain  at  an  acceptable  rate  of  in- 
terest there  for  the  period  of  the  war. 
This  is  being  done  to  a  certain  ex- 
tent and  American  banks  thus  buy- 
ing American  dollars  at  sixty-seven 
cents,  thro  Spanish  loans  will  make 
a  profit  of  fifty  per  cent,  on  such  dol- 
lars when  the  dollar  reacts  to  par 
and  gold  can  be  freely  shipped. 

It  is  obvious  that  American  com- 

[33J 


FOREIGN    EXCHANGE 

merce  and  Allied  commerce  and 
Spanish  commerce  is  being  subjected 
in  this  way  to  a  serious  injury  with 
compensatory  benefits  to  the  Spanish 
and  American  bankers  who  are  sell- 
ing credits  in  Spain. 

METHOD   OF  PLACING  CKEDITS 
ABROAD 

It  ought  to  be  possible  for  Amer- 
ican banks,  for  British  banks,  for 
French  banks  against  adequate  se- 
curities to  borrow  in  Spain  at  an 
acceptable  rate  of  interest  Spanish 
credits  necessary  to  liquidate  the 
comparatively  small  favorable  Span- 
ish commodity  trade  balance.  This 
amount  is  in  the  neighborhood  of 
a  hundred  million  dollars  per  annum. 
This  might  be  accomplished  by  vigor- 
ously campaigning  in  Spain  with  the 

[34] 


FOREIGN   EXCHANGE 

consent,  sympathy  and  assistance  of 
the  Spanish  Government  officials  for 
the  sale  in  Spain  of  the  War  Finance 
Corporation  Bonds,  payable  in  terms 
of  pesetas  running  five  years,  of  lib- 
erty bonds  payable  in  pesetas,  etc., 
etc.,  using  every  available  agency  to 
correct  the  condition  so  injurious  to 
Spain  and  to  the  Allies. 

I  insisted  when  the  War  Finance 
Corporation  Bill  passed  the  Senate 
upon  putting  in  an  authority  that 
these  bonds  might  be  issued  in  terms 
of  foreign  currency  to  accomplish 
this  very  purpose,  and  it  became  a 
part  of  the  Act,  and  later  a  like  pro- 
vision was  made  a  part  of  the  Act 
authorizing  bonds  for  the  Third 
Liberty  Loan.  These  bonds  could 
be  bought  by  American  importers, 
or  by  British  and  French  importers 
and  sold  in  Spain  if  necessary  at  a 

[35] 


FOREIGN   EXCHANGE 

sufficient  discount  to  obtain  Span- 
ish credits  against  the  necessary  pur- 
chases of  the  Allies  or  of  the  mer- 
chants in  the  Allied  countries.  In 
this  way  the  Spanish  business  men 
would  have  a  security  bearing  a  satis- 
factory rate  of  interest,  payable  in 
terms  of  their  own  money,  and  would 
thus  be  assured  of  receiving  their  own 
money  on  a  gold  par  basis  with  a 
satisfactory  rate  of  interest.  This 
would  suffice,  if  properly  carried  out, 
in  bringing  the  American  dollar  to 
par  in  Spain,  and  to  bring  the  British 
pound  sterling  and  the  French  franc 
to  par  in  Spain.  To  accomplish  it, 
however,  requires  a  mechanism  mak- 
ing it  somebody's  business  to  do 
this,  to  carry  on  an  adequate  cam- 
paign to  place  these  securities. 

As   it   is   we   have   no  adequate 
mechanism  with  which  to  handle  it. 

[36] 


FOREIGN   EXCHANGE 

American  or  Spanish  banks  who 
place  credits  in  Spain  and  carry 
credits  in  Spain  till  the  war  ends  will 
make  fifty  per  cent,  on  every  gold 
dollar  at  67  cents  they  buy  in  the 
United  States,  into  Spanish  pesetas 
at  28.50.  They  have  no  public  in- 
terest to  serve  in  preventing  such 
conditions.  They  are  themselves  en- 
gaged in  profiteering  on  American 
commerce  and  on  Allied  commerce. 
We  have  seen  men  trained  as  Amer- 
ican bankers  deliberately  advocating 
that  it  was  best  for  the  United  States 
to  have  its  dollar  at  a  discount,  con- 
trary to  reason,  contrary  to  common 
sense,  and  most  injurious  to  the 
United  States,  to  Great  Britain  and 
to  France,  interfering  with  the  suc- 
cessful prosecution  of  the  war  and 
actually  serving  the  interest  of  Ger- 
many by  indirection.  I  am  willing  to 

[37] 


FOREIGN   EXCHANGE 

assume  that  these  gentlemen  advo- 
cating the  dollar  at  a  discount  are  not 
moved  by  unpatriotic  purposes,  but 
the  result  is  injurious  to  America  and 
favorable  to  Germany  and  is  con- 
trary to  the  public  interest,  while  it 
is  highly  favorable  to  profiteering  by 
private  interests. 

DUTY   OF   GOVERNMENTS 

The  United  States,  Great  Brit- 
ain, France  and  Italy  should  use  the 
firm  strong  hand  of  organized  gov- 
ernment to  prevent  such  harmful 
imposition  of  usurious  rates  on  the 
resources  of  the  Allies  now  engaged 
in  deadly  war.  Exchanges  are  com- 
modities, and  governments  able  to 
fix  prices  on  commodities  and  fair 
interest  rates  on  bonds  can  fix  reason- 
able exchange  and  interest  rates  on 

[38] 


FOREIGN   EXCHANGE 

international  bills,  and  prevent  the 
sale  of  pesetas  above  19.30  or  gold 
par  and  prevent  the  sale  of  lire  at  1 1 
cents  and  then  buying  the  offer- 
ings at  19.30  and  refusing  to  allow 
the  sale  at  any  other  rate.  American, 
English  and  French  banks  refusing 
to  buy  pesetas  except  at  gold  par 
would  end  the  false  values  put 
arbitrarily  on  pesetas  as  far  as  ex- 
change is  concerned  on  the  loan  of 
pesetas. 

In  order  to  sell  pesetas  there  must 
be  both  a  seller  and  a  buyer.  If 
the  Governments  of  Great  Britain, 
France,  Italy  and  the  United  States 
can  control  the  banks  of  those  coun- 
tries and  prevent  their  buying  pese- 
tas at  an  exorbitant  rate  the  market 
for  pesetas  would  be  measurably  con- 
trolled. The  selling  of  pesetas  at  a 
grossly  usurious  rate  is  against  public 

[39] 


FOREIGN   EXCHANGE 

policy.  It  is  against  the  interests  of 
the  Allies.  It  is  a  gross  injustice 
because  it  has  the  effect  of  taxing  the 
Allies  fifty  per  cent,  for  the  use  of 
Spanish  credit  which  ought  to  be  ex- 
tended, if  extended  at  all,  on  a  rea- 
sonably decent  basis.  Therefore,  the 
Governments  of  the  United  States, 
Great  Britain,  France  and  Italy 
would  be  justified,  as  a  war  measure, 
in  forbidding  the  banks  of  the  great 
belligerents  from  buying  pesetas  ex- 
cept on  terms  of  reasonable  interest 
charges,  considering  war  condi- 
tions. 

Moreover,  there  should  be  con- 
certed action  by  the  four  belligerents 
in  making  representations  to  the 
Spanish  authorities  as  to  the  in- 
justice to  the  Allies  of  the  Spanish 
exchange  situation,  and  that  the 
highly  appreciated  Spanish  cur- 

[40] 


FOREIGN   EXCHANGE 

rency,  or  Spanish  credits,  is  doing 
positive  harm  to  Spanish  com- 
merce, as  I  have  otherwise  pointed 
out. 

If  Spain  sells  the  Allies  goods  and 
charges  fifty  per  cent,  for  the  use  of 
Spanish  pesetas,  it  has  the  effect  of 
discriminating  against  Allied  pur- 
chases as  compared  with  Spanish 
purchases  to  the  extent  of  fifty  per 
cent.,  which  is  contrary  to  commer- 
cial justice,  and  by  controlling  the 
exchange  rate,  through  the  control 
of  the  banks  in  New  York,  London, 
Paris  and  Rome,  an  equitable  con- 
dition might  be  restored.  At  the 
same  time  it  is  obvious  that 
credits  properly  secured  and  at 
proper  rates  of  interest  ought  to  be 
placed  in  Spain  through  agencies 
otherwise  pointed  out  in  this  bro- 
chure. 

[41] 


FOREIGN    EXCHANGE 
THE  EFFECT  ON  ITALY 

Italy's  purchases  in  1914  were  five 
hundred  sixty-four  millions  for  im- 
ports against  which  she  exported 
four  hundred  twenty-six  millions;  in 

1915  her  imports  were  nine  hundred 
and  seven  millions  against  four  hun- 
dred  eighty-eight  millions  exports. 
When  she  got  fully  into  the  war  in 

1916  her  imports  were  sixteen  hun- 
dred and  nineteen  millions  against 
five  hundred  and  ninety-six  millions 
exports.    In  1917  her  imports  were 
fourteen  hundred  and  twenty-nine 
millions;    her  exports  four  hundred 
and    thirty-five    millions.       Italy's 
bonds  at  five  per  cent,  have  been  sell- 
ing for  eighty-six  cents  on  the  dollar, 
and  an  American  dollar  in  New  York 
will  at  current  exchange  buy  about 
nine  lire  to  the  dollar,  and  one  dol- 

[42] 


FOREIGN   EXCHANGE 

lar,  now  (August,  1918)  will  actually 
buy  ten  lire  of  Italian  bonds  bearing 
five  per  cent.,  so  that  such  bonds 
would  return  the  investor  ten  per 
cent,  payable  in  lire,  which  after  the 
war  must  come  back  to  par,  and 
gives  the  investor  a  hundred  per 
cent,  bonus  besides. 

This  means  that  brave  Italy,  shed- 
ding her  blood  lavishly  on  the  battle- 
fields for  the  liberty  of  mankind,  is 
paying  a  hundred  per  cent,  on  top  of 
war  prices  for  the  supplies  required 
by  her  people,  except  goods  sold  her 
on  credit  by  her  Allies. 

There  are  several  reasons  for 
this: 

First. — To  the  extent  that  Great 
Britain,  the  United  States  and  her 
Allies  are  not  extending  credits  on  a 
normal  basis  to  Italy,  Italian  pur- 
chasers are  compelled  to  rely  upon 

[43] 


FOREIGN   EXCHANGE 

private  credits  extended  by  citizens 
of  other  countries,  who  may  or  may 
not  understand  the  stability  of  the 
Italian  Government,  nor  the  finan- 
cial security  of  loans  extended  to 
Italian  purchasers.  The  element  of 
hazard,  lack  of  knowledge  and  desire 
for  gain  of  the  private  creditors  of 
Italy  are  important  elements  in  de- 
termining the  enormous  cost  to  Ital- 
ians of  credits  for  their  purchases  for 
war  needs.  To  the  extent  that  the 
United  States,  for  example,  furnishes 
credits  to  Italy,  Italian  purchasers 
only  pay  the  ordinary  war  prices,  but 
precisely  to  the  extent  that  private 
credit  is  extended  to  Italy,  Italy  at 
present  is  paying  approximately  ten 
per  cent,  interest  and  a  hundred  per 
cent,  bonus  on  the  credits  extended 
to  her.  This  should  be  immediately 
corrected. 

[44] 


FOREIGN   EXCHANGE 

This  egregious  example  will  dem- 
onstrate the  importance  of  obtaining 
for  Italy  sufficient  credits  at  fair 
rates  to  cover  her  purchases  during 
the  war,  and  it  illustrates  precisely 
and  fully  the  necessity  of  pro- 
viding the  United  States  with  like 
credit  facilities  at  fair  rates  for 
purchasing  from  Spain,  from  the 
European  neutrals  and  from  other 
nations  where  there  is  a  deprecia- 
tion of  the  currency  of  the  United 
States. 

The  United  States  is  paying  from 
fifteen  to  forty  per  cent,  on  her  pur- 
chases in  nearly  all  the  nations  ex- 
cept in  the  countries  of  Great  Britain, 
France  and  Italy  or  their  immediate 
Allies,  to  whom  the  United  States  is 
extending  large  credits.  It  is  per- 
fectly obvious  that  there  ought  to  be 
immediately  organized  a  scientific,  a 

[45] 


FOREIGN   EXCHANGE 

well-balanced,  systematic  mechan- 
ism for  handling  this  problem,  for 
studying  its  details  in  every  country 
in  the  world.  We  have  no  such  or- 
ganism. The  Treasury  Department 
through  the  Federal  Reserve  Board 
undertakes  to  look  after  the  gold  and 
silver  embargo.  It  has  a  sub-com- 
mittee passing  on  licenses  to  ship 
gold  and  silver.  This  sub-committee 
passes  on  applications  for  the  right 
to  ship  gold  and  silver,  and  is  refus- 
ing to  permit  many  shipments  with- 
out providing  any  means  by  which 
the  foreign  indebtedness  intended  to 
be  covered  by  gold  shipments  can  be 
otherwise  covered  by  gold  credits. 
This  imposes  a  cost  of  destructive 
interest  rates  upon  our  business 
men  requiring  gold  or  foreign  credits 
with  which  to  settle  foreign  obliga- 
tions. 

[46] 


FOREIGN    EXCHANGE 
IN   THE  ARGENTINE 

In  the  Argentine  American  pur- 
chases have  exceeded  American  sales 
to  the  Argentine  during  the  last 
year,  or  since  we  entered  the  war,  by 
about  sixty  million  dollars.  The  Re- 
serve Board  was  enabled  to  effect  an 
arrangement  through  which  Argen- 
tine gold  credits  were  placed  in  New 
York  on  satisfactory  terms  until  the 
war  should  be  over. 

This  is  one  of  the  means  by  which 
to  adjust  our  foreign  purchases  on 
a  basis  which  requires  us  only  to 
pay  a  fair  rate  of  interest  for 
the  indebtedness  due  such  country, 
but  it  is  not  the  only  way;  the  sale 
in  the  Argentine  of  American  securi- 
ties, of  Liberty  Bonds,  payable  in 
pesos,  of  War  Finance  Corporation 
Bonds,  payable  in  pesos,  or  secured 

[47] 


FOREIGN   EXCHANGE 

bank  loans  there,  would  suffice  to 
effect  the  same  ends.  Such  sales 
would  be  equivalent  to  shipping  com- 
modities to  Argentine  in  settlement 
of  our  trade  balance. 

But  if  British  merchants  and 
banks,  if  French  merchants  and 
banks,  if  American  merchants  and 
banks  were  freely  furnished  the  right 
to  buy  Liberty  Bonds  and  War 
Finance  Corporation  Bonds  payable 
in  terms  of  pesos,  thousands  of  indi- 
vidual adjustments  could  be  made 
through  such  securities  or  with  such 
securities  as  a  basis  of  credit  for  the 
period  of  the  war. 

Argentine  has  a  favorable  trade 
balance.  Argentine  has  the  money 
and  credits  to  lend.  Argentine  can- 
not otherwise  conveniently  employ 
these  funds  which  are  in  excess  of 
her  normal  requirements. 

[48] 


FOREIGN   EXCHANGE 

Argentine  is  therefore  in  a  favor- 
able position  to  make  such  loans, 
just  as  Spain  is;  moreover,  if  Argen- 
tine does  not  make  such  loans  she 
will  have  her  trade  injured  in  a  man- 
ner which  was  pointed  out  above  in 
relation  to  Spain. 

The  United  States  also  controls 
through  the  War  Trade  Board  the 
issuance  of  licenses  covering  imports 
and  exports.  These  licenses  can  be 
serviceable  in  bringing  the  dollar 
towards  par  by  opposing  no  obstruc- 
tion to  the  export  of  goods  not  re- 
quired for  actual  war  purposes  to 
countries  to  which  America  owes  a 
balance  of  trade. 

The  Shipping  Board,  as  far  as  the 
war  permits,  should  encourage  fur- 
nishing bottoms  to  take  supplies  of 
commodities  to  those  countries  where 
America  owes  a  trade  balance  in 

[49] 


FOREIGN   EXCHANGE 

order  to  liquidate  such  balances  as 
promptly  as  possible. 

The  Federal  Reserve  Board,  or  the 
Treasury  Department,  acting  under 
the  authority  given  by  Congress  to 
the  President,  to  control  the  transfer 
of  credits  to  and  from  the  United 
States,  has  a  Department  under  the 
management  of  Mr.  Fred  I.  Kent, 
with  offices  in  New  York  and  in  the 
Treasury  Department,  which  vises 
transfers  of  credits  to  and  from  the 
United  States.  This  Department 
should  facilitate  in  every  way  pos- 
sible the  placing  of  American  securi- 
ties, especially  War  Finance  Corpo- 
ration Bonds  and  Liberty  Bonds, 
payable  in  terms  of  the  currencies  of 
the  country  to  which  they  may  be 
sold,  or  in  which  they  may  be  placed 
as  security,  and  should  exercise  every 
effort  to  place  public  and  private 

[50] 


FOREIGN   EXCHANGE 

credits  in  such  countries  where  Amer- 
ica or  the  Allies  are  in  debt  to  over- 
come the  depreciation  of  the  Amer- 
ican dollar  and  of  the  Allied  cur- 
rency, and  to  bring  down  to  par  the 
currencies  of  such  foreign  countries 
in  relation  to  the  United  States  and 
in  relation  to  the  Allies;  otherwise 
the  United  States  and  the  Allies  will 
continue  to  suffer  the  enormous  cost  of 
these  usurious  credits  which  appear  in 
so  egregious  a  form  in  regard  to  Italy, 
but  which  in  degree  applies  with  equal 
force  to  the  United  States,  to  Great 
Britain  and  to  France  in  their  pur- 
chases rfrom  various  other  countries. 
In  1917  the  United  Kingdom  im- 
ported five  billion,  one  hundred  and 
eighty-four  million,  and  exported 
two  billion,  eight  hundred  and  nine- 
ty-four million;  her  excess  imports 
were  therefore  over  two  billion,  two 

[51] 


FOREIGN    EXCHANGE 

hundred  million.  France  had  an 
excess  of  imports  over  exports  of  over 
two  billion.  Italy  had  an  excess  of 
imports  over  exports  of  over  a  billion, 
but  the  total  imports  of  the  United 
States,  the  United  Kingdom,  France 
and  Italy  amounted  to  over  twelve 
billion  dollars,  a  large  part  of  it 
from  neutral  or  non-belligerent  coun- 
tries who  had  a  favorable  balance  of 
trade,  and  upon  which  the  exchange 
rate  ran  from  ten  to  fifty  per  cent. 
The  loss  of  these  gigantic  war  pur- 
chases which  took  place  outside  of 
the  United  States,  Great  Britain  and 
France,  probably  exceeded  a  billion 
dollars  because  of  the  adverse  ex- 
change rate. 

Such  loss  can  be  corrected  by  the 
United  States,  Great  Britain,  France 
and  Italy  by  intelligent,  compre- 
hensive, co-ordinated  employment  of 

[52] 


FOREIGN   EXCHANGE 

credits  and  government  power.  It  is 
a  question  of  an  orderly  arrangement 
by  which  to  systematically  accom- 
plish this  end. 

The  United  States  has  as  its  only 
agency  the  Federal  Reserve  Board 
and  the  Treasury  Department.  The 
Secretary  of  the  Treasury,  occu- 
pied by  many  cares,  being  Direc- 
tor General  of  the  Railroads  of  the 
United  States,  charged  with  the  duty 
of  collecting  and  disbursing  the  gi- 
gantic revenues,  framing  revenue 
plans,  acting  as  Chairman  of  the 
Federal  Reserve  Board,  of  the  Farm 
Loan  Board,  of  the  War  Risk  Insur- 
ance Bureau,  and  in  charge  of  the 
Public  Health  Service,  besides  super- 
vising all  of  the  public  buildings  of 
the  United  States,  not  to  mention 
miscellany,  cannot  give  it  much  per- 
sonal attention. 

[53] 


FOREIGN   EXCHANGE 

The  Governor  of  the  Reserve 
Board  not  only  has  the  supervisory 
control  of  the  Federal  Reserve  Banks 
with  thirty-eight  hundred  millions  of 
resources,  supervising  also  the  mem- 
ber banks,  exceeding  eight  thousand, 
but  is  in  active  charge  of  the  War 
Finance  Corporation. 

The  question  of  adjusting  these 
exchanges  cannot  receive  the  per- 
sonal attention  of  either  the  Secre- 
tary of  the  Treasury  or  the  Governor 
of  the  Reserve  Board.  The  members 
of  the  Reserve  Board  are  charged 
with  duties  of  the  gravest  respon- 
sibility, enough  to  occupy  their  en- 
tire attention. 

Mr.  Oscar  T.  Crosby,  the  very 
able  patriotic  Assistant  Secretary  of 
the  Treasury,  is  trying  to  adjust  the 
exchange  in  Spain  and  Italy;  he  is 
now  in  Europe  engaged  in  this  very 

[54] 


FOREIGN   EXCHANGE 

important  business.  Mr.  Albert 
Strauss  is  acting  as  adviser  of  the 
Treasury  in  connection  with  the  for- 
eign exchange  problem. 

BRITISH    FINANCIAL   POLICY 

Great  Britain,  when  the  United 
States  entered  the  war,  pegged  the 
pound  sterling  in  New  York  at 
$4.76-7/16,  which  means  that  Great 
Britain  through  Morgan  and  Com- 
pany, the  agent  of  the  Bank  of  Eng- 
land, engaged  to  buy  all  drafts  on 
England  payable  in  pounds  sterling 
at  $4.76-7/16  for  each  pound  sterling 
on  the  face  of  such  bills.  This  was 
accomplished  by  the  United  States 
Treasury  furnishing  the  money  to 
Great  Britain  against  British  bonds, 
which  enabled  Great  Britain  and 
British  merchants  to  buy  in  the 

[55] 


FOREIGN   EXCHANGE 

United  States  the  goods  she  required 
without  paying  usurious  rates  of  in- 
terest for  such  credits.  Except  for 
the  backing  of  the  United  States 
Government  the  pound  sterling 
would  have  been  most  seriously  de- 
preciated in  the  United  States  and 
in  the  entire  world. 

Great  Britain,  the  wisest  of  all 
financial  countries,  thoroughly  un- 
derstood this  problem  and  put  the 
pound  sterling  within  two  per  cent,  of 
commercial  par — for  the  purpose  of 
protecting  Great  Britain  against  the 
gigantic  loss  due  to  an  adverse  inter- 
national exchange.  The  United 
States  must  pursue  the  same  policy 
and  make  it  effective  with  other 
countries.  She  has  no  adequate  or- 
ganization by  which  it  may  be  ac- 
complished. 

It  might  be  said — why  do  not  the 

[56] 


FOREIGN    EXCHANGE 

great  New  York,  Chicago  and  Boston 
banks  take  steps  to  protect  the 
United  States  against  this  loss  thro 
the  depreciated  dollar? 

The  answer  is — It  is  none  of  their 
business. 

The  answer  is — They  handle  these 
bills  as  commodities  coming  over 
their  counter;  they  buy  them  and 
sell  them  at  the  market,  and  the 
market  is  fixed  by  persons  who  ap- 
praise the  matter  purely  from  a 
standpoint  of  profit,  and  commis- 
sions based  on  an  estimate  of  implied 
risk.  Banks  buy  Spanish  pesetas 
and  sell  Spanish  pesetas  to  other 
banks  all  over  the  world;  they  do  not 
look  at  the  matter  from  a  public 
standpoint,  and  it  is  not  to  be  im- 
puted to  them  as  a  fault  because  they 
do  not  regard  this  question  from  a 
public  point  of  view. 

[57] 


FOREIGN   EXCHANGE 

Since  the  war  arose  gigantic  vol- 
umes of  foreign  securities  have  been 
placed  on  sale  in  the  United  States 
which  serve  to  protect  them  against 
an  adverse  exchange  in  the  United 
States. 

Bvjthese  means  other  nations  have 
undertaken  to  protect  themselves 
against  an  adverse  balance  of  trade 
in  the  United  States  due  to  the  great 
shipments  of  goods  from  the  United 
States.  A  similar  policy  is  necessary 
for  the  United  States  to  protect  it- 
self in  turn. 

It  will  thus  be  seen  that  the  United 
States  has  loaned  its  Allies  five  thou- 
sand, five  hundred  and  nineteen  mill- 
ions, and  that  there  have  been  floated 
in  the  United  States  in  addition  gi- 
gantic volumes  of  securities  of  other 
nations,  amounting  probably  to  a 
still  larger  sum.  In  addition  to  this 

[58] 


FOREIGN   EXCHANGE 

we  have  bought  from  Europe  and 
paid  for  several  billion  dollars  of 
American  securities  held  in  Europe. 
We  have  also  met  the  cost  of  con- 
ducting the  expense  of  the  United 
States  in  preparing  for  war  on  Ger- 
many and  Austria. 

THE    PRODUCTIVE    POWER    OP 
AMERICA 

It  has  been  estimated  by  excellent 
authority  that  the  productive  power 
of  the  United  States,  including  the 
products  of  agriculture,  of  the  mines, 
of  the  forests  and  factories  on  one 
turnover,  exceeded  sixty  billions  for 
last  year  (1917).  The  actual  re- 
sources of  the  banking  power  of  the 
United  States,  as  shown  by  the  tabu- 
lated returns,  is  over  thirty-nine  bill- 
ions, so  that  the  United  States  is 

[59] 


FOREIGN   EXCHANGE 

financially  the  most  powerful  nation 
in  the  world;  its  credit  is  superior 
to  that  of  any  other  nation  in  the 
world;  its  actual  gold  in  the  Federal 
Reserve  Bank  amounts  to  eighteen 
hundred  millions,  and  in  the  Treas- 
ury it  amounts,  with  the  silver  in- 
cluded, to  twenty-eight  hundred  mill- 
ions. The  power  of  the  United  States 
properly  organized  and  properly  di- 
rected is  sufficient  to  put  the  United 
States  dollar  at  par  throughout  the 
world  and  keep  it  at  par. 

THE   DOLLAR  AT   PAR 

Every  intelligent  man  understands 
the  extreme  importance  of  keeping 
the  United  States  dollar  at  par  in  the 
United  States,  and  it  is  of  equal 
importance,  according  to  the  busi- 
ness transacted,  to  keep  the  United 

[60] 


FOREIGN    EXCHANGE 

States  dollar  at  par  in  our  foreign 
business.  We  bought  last  year  from 
other  nations  nearly  three  billion  dol- 
lars' worth  of  goods. 

If  the  United  States  dollar  is  put 
at  par  and  kept  at  par  it  will  become 
a  stable  measure  of  value  in  inter- 
national contracts  and  will  enable 
merchants  all  over  the  world  to  use 
the  American  dollar  as  a  standard 
measure  of  value.  This  will  lead  to 
international  business  being  trans- 
acted on  American  dollars  and  will 
establish  the  prestige  of  the  United 
States  throughout  the  world  accord- 
ing to  the  actual  financial  and  com- 
mercial strength  of  the  United  States. 

AMERICAN   MERCANTILE   MARINE 

After  the  war  America  will  have  a 
gigantic  international  mercantile  ma- 

[61] 


FOREIGN    EXCHANGE 

rine,  which  must  be  employed  in 
international  commerce;  otherwise 
it  will  pass  into  the  hands  of  other 
nations  who  will  employ  such  ships 
in  commerce.  As  a  means  of  main- 
taining American  commerce  and 
keeping  the  American  merchant  ma- 
rine employed  we  must  expand  our 
export  business,  and  one  of  the  fac- 
tors of  vital  importance  is  to  have 
adequate  foreign  banking  facilities, 
information  and  credit  furnished  our 
exporters  and  our  importers. 

The  banking  capital  employed  in 
the  foreign  exchange  department  of 
the  American  banks  probably  will 
not  amount  to  $200,000,000.  The 
usual  bills  are  30,  60  and  90  day 
bills,  so  that  the  available  American 
Capital  in  this  service  is  by  no 
means  adequate  to  handle  the  for- 
eign business.  Our  imports  and 

[62] 


FOREIGN    EXCHANGE 

exports  in  1917  were  over  nine  bill- 
ions. We  ought  to  handle  a  large 
part  of  foreign  international  bills,  for 
we  have  the  banking  power  if  it 
were  organized  and  employed.  As 
a  means  to  this  end  I  have  introduced 
a  bill  in  the  United  States  Senate 
(Sen.  3928)  which  I  fully  explained 
in  the  Senate  Feb.  25, 1918,  to  estab- 
lish a  Federal  Reserve  Foreign  Bank, 

FEDERAL   RESERVE   FOREIGN   BANK 

The  Federal  Reserve  Foreign  Bank 
proposed  by  Senate  Bill  3928  is 
strictly  in  line  with  the  policy  of  the 
Federal  Reserve  Act  in  the  powers 
granted  to  the  Federal  Reserve 
Banks,  and  is  intended  to  make  effec- 
tive the  principles  of  the  Federal 
Reserve  Act  itself. 

The  Federal  Reserve  Act  author- 

[63] 


FOREIGN    EXCHANGE 

ized  the  Federal  Reserve  Banks  in 
Sections  13  and  14  to  receive  de- 
posits, discount  commercial  bills  and 
acceptances,  deal  in  gold  and  silver, 
to  exchange  Federal  Reserve  notes 
for  gold,  to  contract  for  loans  on  gold 
coin  or  bullion,  giving  therefor  when 
necessary  acceptable  security,  includ- 
ing hypothecation  of  United  States 
bonds  or  other  securities  which  Fed- 
eral Reserve  Banks  are  authorized  to 
hold,  to  buy  and  sell  at  home  or 
abroad  bonds  and  notes  of  the  United 
States,  of  foreign  Governments,  etc., 
buy  and  sell  commercial  bills  of  ex- 
change, to  issue  bank  notes  and  re- 
ceive Federal  Reserve  notes,  to  open 
credits  at  home  or  abroad,  to  open 
and  maintain  accounts  in  foreign 
countries,  appoint  correspondents 
and  establish  agencies  in  such  coun- 
tries wheresoever  it  may  be  deemed 

[64] 


FOREIGN    EXCHANGE 

best  for  the  purpose  of  purchasing, 
selling,  or  buying  bills  of  exchange  or 
acceptances,  arising  out  of  actual 
commercial  transactions  which  have 
not  more  than  ninety  days  to  run 
and  which  bear  the  signature  of  two 
or  more  responsible  parties,  and  with 
the  consent  of  the  Federal  Reserve 
Board,  to  open  and  maintain  bank- 
ing accounts  for  such  correspondents 
or  agencies,  etc. 

The  original  Federal  Reserve  Act 
also  provided,  in  Section  25,  that 
any  National  Banking  Association 
with  a  capital  surplus  of  a  million 
dollars,  or  more,  might  be  permitted 
to  establish  branches  in  foreign  coun- 
tries for  the  furtherance  of  the  for- 
eign commerce  of  the  United  States 
and  to  act  as  fiscal  agents  of  the 
United  States. 

Such  National  Banks  are  also  au- 

[65] 


FOREIGN    EXCHANGE 

thorized  to  take  stock  in  banks  or 
corporations,  chartered  under  the 
laws  of  the  United  States  or  of  any 
State  thereof,  and  principally  en- 
gaged in  international  or  foreign  ex- 
change. 

Under  Section  25  some  of  the 
National  Banks  have  established 
branches  in  foreign  countries. 

Some  of  them  have  taken  stock  in 
banks  doing  a  foreign  business. 

But  the  Federal  Reserve  Banks 
have  not  exercised  the  powers  con- 
templated by  the  Federal  Reserve 
Act  in  foreign  bills  or  foreign  busi- 
ness except  in  a  negligible  degree. 

The  Federal  Reserve  Banks  have 
been  intensely  occupied  in  domestic 
business,  so  there  is  that  reason  why 
they  have  not  been  disposed  to  enter 
the  foreign  field.  These  banks  have 
increased  their  resources  until  now 

[66] 


FOREIGN   EXCHANGE 

they  exceed  thirty-eight  hundred 
million  dollars.  But  it  is  also  true 
that  six  of  their  nine  Directors  are 
chosen  by  the  privately  owned  banks 
some  of  whom  fear  the  competition 
of  the  Reserve  Banks  in  foreign 
banking. 

Congress  later  amended  the  Fed- 
eral Reserve  Act,  at  the  request  of 
the  Federal  Reserve  Board,  and  gave 
the  Federal  Reserve  Board  authority 
to  require  the  Federal  Reserve  Banks 
to  establish  foreign  branches,  but 
practically  nothing  has  been  done 
under  this  authority  granted  by 
Congress.  Senate  Bill  3928  proposes 
to  add  a  new  Section  to  the  Federal 
Reserve  Act  as  Section  25  A.,  creat- 
ing a  Federal  Reserve  Foreign  Bank 
of  the  United  States,  under  the  su- 
pervision of  the  Federal  Reserve 
Board  to  be  located  in  the  City  of 

[67] 


FOREIGN    EXCHANGE 

New  York,  with  a  capital  of  one 
hundred  million  dollars,  with  an  in- 
itial capital  of  twenty  millions,  the 
stock  to  pay  five  per  cent.,  to  be 
non-taxable,  to  be  offered  to  the  pub- 
lic and  to  the  banks  at  par  and  if 
not  taken  by  them  to  be  taken  by 
the  United  States  Government. 

The  powers  proposed  for  this  bank 
are  practically  the  same  as  are  given 
to  the  Federal  Reserve  Banks,  but  the 
management  of  the  bank  is  put  into 
the  hands  of  directors,  nine  in  num- 
ber to  be  designated  by  the  President 
of  the  United  States.  The  proposed 
Act  directs  that  the  members  of  the 
board  shall  be  men  of  tested  mer- 
cantile experience  and  fairly  repre- 
sentative of  the  various  parts  of  the 
United  States.  It  does  not  say  that 
they  shall  not  be  bankers,  but  if  they 
are  bankers  they  must  be  bankers 

[68] 


FOREIGN   EXCHANGE 

who  have  had  tested  mercantile  ex- 
perience, such  as  is  required  of  the 
Governors  of  the  Bank  of  Eng- 
land. 

THE   PURPOSE   OF   THE   BILL 

The  purpose  of  this  proposed  Act 
is  to  establish  a  publicly  controlled 
agency  in  charge  of  men  with  tested 
mercantile  experience,  who  shall  ad- 
minister the  bank  in  the  interest  of 
American  commerce,  of  American 
importers  and  exporters,  of  American 
manufacturers  and  producers,  in  the 
interest  of  American  consumers,  and 
not  merely  in  the  interest  of  bankers, 
but  in  co-operation  with  the  bankers, 
as  the  Bank  of  England  or  the  Bank 
of  France  co-operates  with  other 
banks  while  being  influenced  also  by 
the  general  public  interest. 

[69] 


FOREIGN   EXCHANGE 

Such  a  bank  would  buy  and  sell 
international  bills  of  exchange  and 
acceptances  from  and  to  American 
and  foreign  banks  who  desired  to  sell 
or  buy  such  bills. 

Such  a  bank  would  in  this  way 
serve  the  interests  of  other  banks 
handling  international  exchange,  but 
such  a  bank  being  publicly  controlled 
would  furnish  American  importers 
and  exporters,  manufacturers  and 
producers  with  credits  abroad,  with 
banking  facilities  and  accommoda- 
tions at  a  standardized  fair  rate  of 
profit,  which  would  serve  the  com- 
mon interest  of  American  business 
men. 

Such  a  bank  publicly  controlled 
would  not  expose  an  importer's  busi- 
ness or  an  exporter's  business  to  trade 
rivals, — a  practise  known  to  exist  in 
certain  foreign  exchange  departments 

[70] 


FOREIGN   EXCHANGE 

where  Germans  systematically  con- 
veyed such  valuable  information  to 
rival  German  firms. 

Such  a  bank  would  furnish  foreign 
exchange  without  profiteering  or 
speculating. 

Such  a  bank  would  be  concerned 
to  keep  the  American  dollar  at  par 
and  in  co-operation  with  the  Gov- 
ernment of  the  United  States  would 
take  the  essential  steps  necessary  to 
that  end,  a  function  which  no  private 
bank  could  exercise. 

Such  a  bank  through  the  Federal 
Reserve  Banks  could  become  a  means 
of  extending  to  every  member  of 
the  Federal  Reserve  System  foreign 
banking  facilities  and  information 
for  the  benefit  of  the  local  importers 
and  exporters,  so  that  a  member 
bank  could  take  a  draft  of  a  local 
exporter  on  any  part  of  the  world 

[71] 


FOREIGN   EXCHANGE 

and  have  it  cashed  whenever  the 
local  bank  desired  the  money. 

Such  a  bank  could  place  these  bills 
with  other  Federal  Reserve  Banks 
and  with  member  banks  who  had 
unemployed  money. 

Such  a  bank  as  a  bank  of  deposit 
could  utilize  some  of  the  very  large 
deposits  now  placed  at  two  per  cent, 
and  could  furnish  American  import- 
ers and  exporters  banking  accommo- 
dations at  as  cheap  a  rate  as  does 
Lombard  Street.  Lombard  Street  in 
London  now  finances  the  commercial 
bills  of  the  world,  running  into  thou- 
sands of  millions  at  three  and  one- 
half  per  cent,  per  annum,  while  the 
current  New  York  and  Boston  rate 
is  a  minimum  of  four  and  one-half. 
The  international  exchange  business 
of  the  world  cannot  be  brought  to 
America  unless  America  extends  ac- 

[72] 


FOREIGN   EXCHANGE 

commodations  on  as  favorable  terms 
as  London,  which  is  now  the  com- 
mercial and  financial  center  of  the 
world.  America  has  the  power. 

America,  as  a  matter  of  fact,  has 
loaned  Great  Britain  and  Allies  since 
we  entered  the  war,  April,  1917, 
many  billions  besides  taking  over 
many  billions  in  foreign  securities 
placed  in  America — buying  billions 
of  American  securities  held  in  Europe, 
in  addition  to  the  gigantic  financing 
of  the  war  by  the  United  States  itself. 

Such  a  bank  publicly  controlled  by 
having  gold  deposits  in  Europe  and 
Asia  could  make  it  unnecessary  to 
incur  the  economic  loss  of  transfer- 
ring gold  back  and  forth  across  the 
Atlantic  and  Pacific. 

Such  a  bank  could  not  only  bring 
the  American  dollar  to  par,  but 
what  is  more  important  could  fix 

[73] 


FOREIGN    EXCHANGE 

the  American  dollar  at  commercial 
par  and  maintain  it  there  as  a  stand- 
ard measure  of  value  for  interna- 
tional contracts  throughout  the 
whole  world.  Unless  this  is  done 
America  cannot  become  the  financial 
center  of  the  world. 

Unless  this  is  done  the  gigantic 
mercantile  marine,  which  America 
is  now  building  at  great  cost,  will 
not  be  adequately  served  and  sup- 
plied with  the  export  and  import 
business  necessary  to  maintain 
these  ships  under  the  American 


Such  a  bank  would  not  only  fur- 
nish foreign  banking  facilities  to 
every  part  of  the  United  States,  but 
would  be  in  a  position  to  furnish  reli- 
able credit  information  to  American 
importers  and  exporters,  manufact- 
urers and  producers  as  to  foreign 

[74] 


FOREIGN   EXCHANGE 

t' 

buyers  and  foreign  sellers;  reliable 
information  and  accommodation  with 
regard  to  shipping  conditions,  stor- 
age, insurance  and  other  questions 
essential  to  the  convenient,  econom- 
ical and  safe  transaction  of  inter- 
national business. 

Such  a  bank  publicly  controlled  is 
the  mechanism  through  which  inter- 
national exchange  can  be  stabilized, 
the  American  dollar  maintained  at 
par,  American  commerce  furnished 
with  credit  facilities  and  adequately 
promoted  throughout  the  world.  It 
is  the  one  thing  needed  to  perfect  the 
Federal  Reserve  System  of  the 
United  States,  now  acknowledged  by 
the  banks  themselves  as  enabling 
them  to  serve  their  customers  as 
never  before,  enabling  them  to  con- 
duct their  business  with  a  sense  of 
security  they  never  felt  before,  and 

[75] 


FOREIGN   EXCHANGE 

enabling  them  to  make  better  re- 
turns upon  their  capital  than  ever 
before. 

I  have  felt  justified  in  preparing 
this  brochure  that  I  might  call  the 
attention  of  American  business  men 
and  of  American  bankers  to  the 
importance  of  thus  perfecting  the 
Federal  Reserve  System,  in  the  hope 
that  with  their  approval  and  co- 
operation, public  opinion  might  suffi- 
ciently crystallize  to  make  itself 
effective  in  legislative  enactment. 
Congress  does  not  go  very  far  ahead 
of  public  sentiment.  This  question 
must  be  determined  by  public  opin- 
ion and  this  booklet  is  justified  as 
one  of  the  steps  to  attract  atten- 
tion and  inform  the  public  on  this 
question. 

Some  of  the  banks  with  foreign 
exchange  departments  seem  to  imag- 

[76] 


FOREIGN    EXCHANGE 

ine  that  such  a  bank  would  compete 
with  them.  The  fact  is  the  compe- 
tition for  international  bills  has 
taken  the  very  great  body  of  these 
bills  to  Lombard  Street,  and  some 
American  banks  give  their  customers 
the  Lombard  Street  rate  by  sending 
their  bills  to  Lombard  Street  instead 
of  to  New  York.  The  bills  are  issued 
to  the  extent  of  many  billions  and 
no  bank  need  fear  not  getting  all  of 
such  business  as  they  may  really 
need  or  desire.  The  trouble  is  we 
have  not  available  the  capital  re- 
quired to  handle  foreign  bills  and  we 
should  take  immediate  steps  to  make 
American  banking  capital  more  avail- 
able for  such  purpose. 

The  available  capital  of  American 
banks  with  foreign  branches  at  pres- 
ent is  inadequate  to  handle  inter- 
national bills.  The  imports  and  ex- 

[77] 


FOREIGN   EXCHANGE 

ports  of  the  United  States  alone 
the  last  year  exceeded  nine  billions, 
and  the  imports  and  exports  of  the 
world  business  handling  international 
bills  are  very  much  larger  yet.  A 
number  of  the  best  foreign  exchange 
experts  engaged  in  handling  such 
bills  have  declared  themselves  warm- 
ly in  favor  of  this  measure;  they  do 
not  fear  the  Federal  Reserve  Foreign 
Bank;  they  welcome  it,  realizing  it 
would  serve  the  banks  in  the  same 
way  in  the  foreign  field  which  the 
Federal  Reserve  Banks  serve  in  a 
domestic  way. 

Importers  and  exporters  who  have 
studied  the  question  strongly  favor 
the  publicly  controlled  Federal  Re- 
serve Foreign  Bank.  Preparedness 
now  for  after-war  peace  problems  is 
urgent — other  nations  are  vigorously 
acting.  The  United  States  cannot  be 

[78] 


FOREIGN   EXCHANGE 

a  Great  Leader  of  the  world  in  Com- 
merce and  Finance  unless  it  leads 
in  fact  by  concrete  steps  and  by  wise 
laws  providing  the  mechanism  for 
such  leadership. 


THE    END 


A     000124179     3 


